Servicing the economy

Phil Ruthven considers the various industries contributing to Australia’s economic growth and finds a strong services sector is leading the charge.

Phil Ruthven AM FAICDChairman IBISWorld

01 August 2016

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Australians can worry more than is justified. We hear about jobs lost from our car, engineering, construction, mining, and aluminium smelting industries, video stores closing, other job-shrinking industries and the outsourcing of activities to overseas workers. And then many vested interests tell us we should save these industries and their employment at all costs.

What is less publicised is the fact that over the past five years to March this year the nation created six times more jobs than it lost. Yes, six times more. Indeed, every year we create far more jobs than we lose.

We are not quite back to full employment yet, but it is an achievable target. The nation needs changes to our labour market to make it more responsive, flexible and commercial in the new age, which has displaced industrial age industries, but not the rigidities of that age. Those rigidities included protectionism and inflexible working arrangements, which are still with us.

Certainly, there is no shortage of new jobs and industries in our prospective economy in the decades ahead; it is just a case of providing the conditions for their expansion or creation, especially for our youth suffering with twice the unemployment rate of the nation at large.

Interestingly, 11 out of every 12 new jobs came from service industries over the past five years; and six of these 11 came from health, hospitality (including inbound tourism), professional and technical services, and education. Now almost 80 per cent of the nation’s 12 million employed are in service industries.

When it comes to the output of the economy via industry value-added, the importance of industries differs from the job scene. This is partly due to varying levels of capital intensity or job intensity across our industries. All up, the economic growth over five years was $216 billion, or 2.7 per cent per year from the starting point of $1.447 billion in 2011. Had we grown at the normal post-industrial rate of 3.2 per cent per year then the growth would have been $40 billion more at $256 billion over that period.

Time for reform

To recover that sort of growth in the future, Australia needs reform: not only to the labour market as mentioned earlier, but to our parliamentary structure, budgetary discipline, taxation, and telecommunications to benefit from the worldwide and competitive digital disruption era.

Returning to the major contributing industries to our growth, mining has been the standout performer. It has single-handedly accounted for $45 billion, or a fifth, of our gross domestic product (GDP) growth over the past five years, as the diagram shows. Even with the challenges of the past year, it accounted for a sixth of our GDP growth in the year to March 2016. The collapse in commodity prices in recent years has many believing that the boom is over. It isn’t in volume terms, and that is what real GDP measures, as it does with all goods and services produced in a country.

Construction contributed more than 10 per cent of the growth; and all the goods-based industries added nearly a third of our growth in GDP, easing to just under a quarter in the most recent 12 months. Yet manufacturing accounted for nearly all (97 per cent) of the lost $8 billion GDP, so the goods-based primary and secondary sectors had mixed fortunes.

What is clear is that our economic growth is being driven by the service industries: more than 67 per cent of the GDP growth over the past five years; and over 75 per cent over the most recently reported 12 months. The growth of mining was matched by finance, insurance, health, and social assistance over the five-year period. These last two industries contributed $47 billion growth in our GDP compared with $44 billion from mining. Other service industries added almost $100 billion.

In closing out this analysis of our growth, it is important to dispel the notion that producing goods creates more wealth than producing services.

Firstly, the only wealth creating industry is one that the marketplace wants – or wants at an affordable price – and is prepared to pay for, either directly or through their taxes. On this basis, producing too much of anything doesn’t make sense, be it goods or a service. Or producing it at a price the market won’t accept doesn’t make sense either.

Secondly, all products are services anyway. The use of the word “goods” and “services” is a construct that has helped consumers distinguish between a physical product and one that is experienced rather than being tactile. The same dilemma emerges with the terms “tangibles” and “intangibles”, both in the sense of being products or items on a balance sheet.

The reality is that we don’t make the raw materials that make up our goods. We simply move the materials from A to B (mining) or we transform them with inventiveness and labour (manufacturing). Goods, as products, are essentially free raw materials, with labour and profits frozen in. Until consumed. So they too are a service product.

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